Ghana - Private Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6543-GGH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 46.9 MILLION TO THE REPUBLIC OF GHANA FOR A PRIVATE SECTOR ADJUSTMENT CREDIT APRIL 17,1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedi (C) US$1 = 1060 el US$0.0094 ABBREVIATIONS AND ACRONYMS AGC - Ashanti Goldfields Corporation AGSAC - Agricultural Sector Adjustment Credit APDF - Africa Project Development Facility BOG - Bank of Ghana DIC - Divestiture Implementation Committee ESAF - Enhanced Structural Adjustment Facility ERP - Economic Recovery Program ESW - Economic and sector work FINSAC - Financial Sector Adjustment Credit GCB - Ghana Commercial Bank GOG - Government of Ghana GNPC - Ghana National Petroleum Corporation GSC - Ghana Supply Commission ICB - International competitive bidding MORH - Ministry of Roads and Highways MOWH - Ministry of Works and Housing NIB - National Investment Bank NIRP - National Institutional Renewal Program ODA - Overseas Development Administration OED - Operations Evaluation Department PFP - Policy Framework Paper PSAC - Private Sector Adjustment Credit PSAG - Private Sector Advisory Group RLC - Regional Loan Committee SAC - Structural Adjustment Credit SITC - Standard International Trade Classification SOE - State-owned enterprises SSCB - Social Security Bank SAC - Structural Adjustment Credit VAT - Value added tax GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT CONTENTS CREDIT AND PROGRAM SUMMARY ......................... i I. RECENT MACROECONOMIC DEVELOPMENTS .............. 1 U. RECENT DEVELOPMENTS IN THIE PRIVATE SECTOR ... ...... 3 m. BANK GROUP'S PRIVATE SECTOR ASSISTANCE STRATEGY ... 4 IV. THE PRIVATE SECTOR ADJUSTMENT PROGRAM .......... . 7 A. Privatization ...................... 8 1. Past Divestiture Efforts ............................ 8 2. The Proposed Program ............................ 9 B. Macroeconomic Policy Framework ........ .. ............. 12 1. Short-Term Macroeconomic Policies .................... 13 2. Public Expenditure Management ...................... 15 3. Medium-Term Sustainability and Public Service .... ......... 18 V. THE PROPOSED CREDIT ............................. 19 A. Credit History ................. ................... 19 B. Tranching and Conditions ............. ............... 19 C. Procurement and Disbursement ......... .. .............. 22 D. Benefits and Risks ............... .................. 23 1. Benefits ........... 23 2. Risks Facing Macroeconomic Performance ................ 24 3. Risks Facing Implementation of Privatization .............. 24 E. Monitoring and Reporting ............. ............... 25 ANNEXES 1. Policy Matrix 2. Approved Procedures for Divestiture of State-Owned Enterprises (SOEs) 3. Preliminary Schedules for Divestiture of Four Strategic SOEs 4. Implementation of Divestiture of Small and Medium SOEs 5. Letter of Development Policy of March 24, 1995 6. Terms of Reference for the Study on the External Marketing of Cocoa 7. Key Economic Indicators 8. The Status of Bank Group Operations in Ghana 9. Supplemental Credit Data Sheet MAP: IBRD 23606 IThis document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. i   GHANA: PRIVATE SECTOR ADJUSTMENT CREDIT CRED1T AND PROGRAM SUMMARY Borrower: Republic of Ghana Amount: SDR 46.9 million (US$70 million equivalent) Terms: Standard IDA terms with a maturity of 40 years Credit Description: The proposed Credit would provide balance of payments financing in support of the Government's program to promote private sector growth by accelerating the pace of privatization and by maintaining an appropriate macroeconomic policy framework, including improved management and poverty-orientation of public expenditures. The privatization component, which cuts across several sectors and uses private firms to implement privatization, has three parts: the first, covers 46 medium sized state-owned enterprises (SOEs); the second, covers 64 small SOEs; and the third, covers 4 large and strategic SOEs, including Ghana Telecom and State Insurance Corporation. Of these, the Government is expected to sell or liquidate 48 small and medium-sized SOEs and to offer for sale 3 large and strategic SOEs including Ghana Telecom, within the program period. The macroeconomic framework component, in addition to ensuring fiscal and monetary discipline, seeks to implement better expenditure monitoring systems in 16 ministries covering at least 70 percent of total expenditures, a more efficient multi-year contracting system in 2 ministries, and a comprehensive accounting system in 6 ministries. Also, expenditures on basic education, primary health, and rural infrastructure would be increased in real terms to improve the poor's human resources and income-augmenting opportunities. Benefits: The proposed operation will increase the efficiency and the level of investment and thus permit an acceleration of growth. The Government, through its actions under the Program, will have signaled strong support for an increased role of the private sector in Ghana's future investment and growth. Opening up the telecommunications sector to private participation and offering Ghana Telecom for sale within the program period will mark a second important threshold in privatization, the first being the sale of Ashanti Goldfields in 1994. Privatizing the privatization process also augurs well for the private sector; it will harness the drive and energy of private firms in the implementation of divestiture, and it will make the sales more transparent and more sustained. Improved  ii expenditure management and a stable macroeconomic framework will give confidence to the private sector. A well-run public financial management system will ensure that aggregate expenditure is controlled, private providers of public services get paid on time, and complementary public investment in infrastructure and human resources gets implemented expeditiously. Risks: The proposed operation faces several risks, but they are manageable. Potential problems facing the maintenance of macroeconomic stability stem from risks to the fiscal and external accounts. On the fiscal side, a real increase in public service wage and wage-related expenditures can convert the projected fiscal surplus to a significant fiscal deficit. There is, however, reason to believe that the Government is acutely aware of this risk and may adopt measures to contain the pressures better than it did in 1992. The establishment of the National Oversight Committee by the President two years before the election to oversee the National Institutional Renewal Program aimed at ensuring a leaner and more effective public service augurs well for such containment. On the external side, a large terms-of-trade shock or a significant shortfall in concessional financing could undermine macroeconomic stability. However, Ghana's terms of trade are projected to improve in the next two years and remain at the new level after that. While the Government is firmly committed to the Program, the expeditious implementation of the privatization program faces the risk that privatization will be slower because the buying capacity of the private sector is lower than estimated. There is also the risk of political resistance to privatization, even after initial successes, either because retrenched workers do not find employment, or because foreign investors are not liked. These risks are manageable as the likely retrenchments are low and the response to foreign investment has so far been favorable. Disbursement: The Credit will be disbursed in three tranches. The first tranche of US$30 million equivalent will be disbursed upon credit effectiveness. The second and third tranches of US$15 and US$25 million equivalent will be released upon compliance with tranche release conditions, expected to occur in 10 and 20 months after release of the first tranche, respectively. Retroactive Flnancing: Retroactive financing in an amount not exceeding US$14 million equivalent will be allowed on the basis of eligible expenditures incurred after February 1, 1995. Map: Ghana (IBRD 23606)  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED PRIVATE SECTOR ADJUSTMENT CREDIT TO THE REPUBLIC OF GHANA 1. I submit for your approval the following report and recommendation on the proposed Private Sector Adjustment Credit (PSAC) to the Republic of Ghana for SDR 46.9 million, an amount equivalent to US$70 million, on standard IDA terms. The proposed Credit is intended to provide balance of payments financing in support of the Government's program to promote private sector growth by accelerating the pace of privatization and by maintaining an appropriate macroeconomic policy framework, including improved management and poverty orientation of public expenditures. This Credit, one of three adjustment credits envisaged in the country assistance strategy, would deepen and strengthen the policy reforms implemented under previous adjustment and investment operations. I. RECENT MACROECONOMIC DEVELOPMENTS 2. Ghana's gradualist and sustained adjustment strategy, adopted in 1983 under the Economic Recovery Program (ERP), turned the economy around. In the 10 years before the introduction of the ERP, real GDP fell by 1 percent a year; since its introduction, real GDP has risen by 5 percent a year. The ERP moved Ghana from a grossly overvalued multiple exchange rate system to a market-determined one, from a quantitatively controlled trade regime to one with relatively low tariffs on imports, and from an economy with price controls to one without. For exporters and indirect exporters of nontraditional products, various schemes for duty and tax relief on imported inputs are now available. The tax regime has been rationalized and the corporate tax rate is low. The investment regulations have been liberalized. Controls on the marketing of agricultural outputs and inputs have been removed-with the important exception of cocoa export marketing. 3. Unfinished Reform Agenda. Nevertheless, a substantial reform agenda- especially for private sector development-remains to be implemented. Liberalization of cocoa exports and petroleum imports are yet to take place. The financial sector has been partly reformed; much more remains to be done to enhance financial intermediation, in particular to increase competition among financial institutions by divesting banks and insurance companies, and to improve the legal and financial infrastructure. Reforms in public expenditure management and the public service as well as progress in the divestiture of state-owned enterprises (SOEs) have been slow. 4. Private Investment. Reflecting the unfinished reform agenda and probably the gradualist adjustment strategy, the rate of private investment and savings remains low. Not only is the rate of private investment low in relation to the average for low- income countries, its trend up to 1991 was not maintained from 1992 onwards. Both public and private investment more than doubled between 1985 and 1991, but private  2 investment fell precipitously in 1992 due to political uncertainty. It is yet to achieve the levels reached earlier because of macroeconomic instability since then. 5. Election-Related Fiscal Shock. In 1992, shortly before the elections, civil servants demanded and received a large increase in wages. This was followed by increases in payments on employment-related benefits for non-civil service workers in agencies funded by the budget. There were slippages in revenue too. As a result, the narrow fiscal balance moved from a surplus to a deficit of about 5 percent of GDP in that year, the money supply rose by more than 50 percent, and the current account deficit widened to 9 percent of GDP. The cedi depreciated sharply and inflationary pressures increased. Private investment fell precipitously. 6. Improvements in FLscal Situation. In 1993, the fiscal situation improved- but not as much as planned. Real GDP growth for 1993 was 5 percent-somewhat more than programmed-but Ghana's financial performance fell short of expectations. Most of the program's benchmarks were missed. The Government's budget recorded a deficit of 2.5 percent of GDP in 1993 against the targeted surplus of 0.3 percent. The slippage resulted mainly from higher current expenditures and a shortfall in tax revenue from petroleum excise duties; the latter reflected action by Parliament to bar a second-round increase in excise duties. As a consequence, money supply grew by 30 percent and inflation reached 27 percent in December 1993, on an annual basis. 7. Fiscal Outturn in 1994. The budget moved from a deficit of 2.5 percent in 1993 to a deficit of 0.8 percent in 1994. This fiscal performance reflected the failure to impose an import duty of 10 percent on a range of zero-rated and exempted goods. In addition, the volume of dutiable imports was lower than previously envisaged. On the expenditure side, personal emoluments and domestic interest payments were above target. These revenue shortfalls and expenditure overruns were financed by divestiture receipts which exceeded original projections by around 3 percent of GDP.' 8. Macroeconomic Performance. In 1994, inflationary pressures have intensified in the wake of significant monetary expansion and low GDP growth. Implementation of monetary policy was undermined by arrears on oil-related credits incurred by the Ghana National Petroleum Company (GNPC) to the Bank of Ghana. As a result, money supply grew by around 46 percent. Also, real GDP growth was 3.8 percent, somewhat less than the projected 5 percent, despite strong gains in mining and service sectors. Untimely rains and ethnic conflict in the north undermined growth in the agricultural and manufacturing sectors. Inflation rose to 34 percent on an end-of-period basis. However, the external current account adjustment in 1994 was as envisaged. The exchange rate depreciated in line with inflation and helped to keep import demand in check. Exports rose by more than 15 percent which was higher than the annual average of 7 percent, largely because of higher world pnces. 1 Inclusive of the excess divestiture receipts, the narrow fiscal balance had a surplus of around 2 percent of GDP.  3 9. Macroeconomic Program for 1995. As announced in the budget, macroeconomic stability is programmed to be restored over the course of 1995 (see paras. 40-42). Macroeconomic performance and policy are expected to be monitored more frequently by the IMF under the proposed ESAF program for the 1995-97 period (see para. 43). H. RECENT DEVELOPMENTS IN THE PRIVATE SECTOR 10. There is growing evidence of a sea change in government attitudes towards the private sector. The private sector, long the object of suspicion and arbitrarily enforced regulations, is now being sought by the Government as a partner in growth. This is reflected in the supportive nature of the dialogue with the private sector, in the recent policy actions, and in the intensification of the privatization program. In turn, these have improved private sector perceptions about Ghana as a place in which to invest. 11. Dialogue with the Private Sector. The public-private sector dialogue- initiated under the Private Sector Advisory Group (PSAG) in 1991 with a handful of private sector leaders-has since been broadened and strengthened through the Private Sector Roundtable. The latter, composed of a representative spectrum of Ghanaian entrepreneurs and senior government officials, meets regularly to discuss relevant policy issues, including accelerated privatization, technology development, financial sector liberalization, and legal and financial infrastructure development. 12. Recent Policy Actions. The improved dialogue has led to changes in policies. The Statutory Corporations Act, approved in December 1993, permits conversion of statutory public corporations into companies with saleable shares; this will facilitate privatization. The new and more liberal Investment Act, approved in 1994, liberalizes the overall private investment climate further. Ghana's acceptance of its obligations under Article VIII of the IMF Articles of Agreement in March 1994-to achieve its balance of payments objective through appropriate financial and exchange rate policies rather than current account controls-will also boost its image with international investors. The Government has developed a regulatory framework for private participation in the telecommunications sector which is being presented to Parliament. 13. Privatization. Ghana's privatization program has gathered a new momentum. Notwithstanding initial controversy and its original revenue-related motivation, the sale of government shares in Ashanti Goldfields Corporation (AGC) has generated broad-based support for privatization. Also, the sale of the Government's minority holdings-to international fund managers-in seven companies listed on the Ghana Stock Exchange has reinforced that support. The Divestiture Implementation Committee (DIC) has recently sold 10 more medium and small majority-owned SOEs to the private sector. New and more transparent procedures for divestiture, including the subcontracting of the implementation of divestiture to private firms, have been approved by the Cabinet and disseminated to the public (see Annex 2). There is also evidence of renewed commitment to the divestiture of commercial banks.  4 Internationally reputed private financial advisors have been contracted to implement divestiture of 60 percent of the shares of the Ghana Commercial Bank (GCB), the Social Security Bank (SSB) and the National Investment Bank (NIB). Their divestment will reduce the dominance of government in the banking sector and increase competition. 14. Perceptions of Foreign Investors. The relatively easy placing of the shares of Ashanti Goldfields Corporation (AGC) and the seven companies listed on the Ghana stock exchange with international fund managers abroad suggests that a reversal of Ghana's earlier image as anti-foreign investment is under way. Indeed, Ghana is now starting to be viewed as having good investment potential. Fund managers from respectable international investment firms have bought shares in Ghanaian companies. The new perception about government support for the private sector is also evident in inflows of private foreign investment in mining and more recently in the agro-processing sector. 15. Domestic Constituency for Privatization. Broad-based Ghanaian participation in the AGC share offering has created a large domestic constituency for privatization. AGC workers, farmers, civil servants, and local companies bought shares in AGC and are interested in its growth. Meanwhile, the jump in total pitalization of the Ghana Stock Exchange from